The advantages of Portugal’s non-habitual resident tax regime

You may consider moving to Portugal for a lifestyle change or to soak up some sunshine in your retirement years. But did you know you could also enjoy a decade of generous tax breaks? That’s because Portugal offers new residents special tax benefits under the non-habitual resident (NHR) regime.

What is non-habitual residency?

Introduced in 2009 by the Portuguese government to attract ‘high value’ industries and individuals, NHR is effectively a tax holiday for your first ten years living in the country.

If employed in Portugal, non-habitual residents can benefit from a flat 20% income tax rate – a significant reduction on the usual scale rates that reach up to 48%. You can qualify for this rate if you work in one of the pre-defined ‘high value-added’ scientific, artistic or technical professions.

Crucially, the NHR regime can be also be highly beneficial for retirees and other expatriates, as it offers the opportunity to receive foreign income – including pensions – completely tax-free.

Tax-free foreign income

Under NHR, most income from a foreign source is exempt from Portuguese taxation for ten consecutive years, as is income that is taxable in another country.

Importantly, this can apply even if the income is not actually taxed in the home country. UK dividends, for example, escape Portuguese taxation under the NHR scheme because they are taxable in Britain (according to the UK/Portugal double tax treaty). In practice, however, ‘disregarded income’ rules can eliminate UK tax liability for non-residents. As a result, you could end up paying no tax – in either country – on the income (although gains on UK shares will not qualify for NHR exemption).

Tax-free pension income

Most UK pensions – including private pensions, company pensions and the State Pension – will not be taxed under NHR (even though the UK/Portugal tax treaty gives Portugal exclusive taxing rights).

So however you access your UK pensions – regular income, cash withdrawals or one lump sum – you can generally do so as a non-habitual resident without being taxed in either country.

The exceptions here are UK government pensions (including local authority, army, police, teaching, fire service and some NHS pensions) which always remain taxable in the UK.

People of any nationality (including non-EU/EEA citizens) can potentially qualify for NHR if they have not been resident in Portugal within the previous five calendar years.

You need to meet Portuguese residency rules to be eligible, however, and these requirements may change for Britons post-Brexit. It will therefore be much easier to apply now as an EU citizen with full freedom of movement. Currently, you can acquire Portuguese residency by spending at least 182 days a year in Portugal or having your main home here.

Although Brexit itself will not affect Britons’ eligibility for non-habitual residency, domestic tax rules are always subject to change. It is also possible that the UK government may negotiate special exemptions to increase taxation of Portuguese-resident nationals once it sheds its EU obligations.

So if you have recently arrived in Portugal – or are thinking about making a permanent move here – register for NHR with the Portuguese tax authorities as soon as possible to make sure you lock-in today’s benefits.

Other tax benefits in Portugal

Even if you do not qualify for NHR, Portugal can still be very tax-efficient for British expatriates.

While UK pension income outside the NHR regime attracts the usual scale Portuguese income tax rates up to 48%, in some circumstances it is possible to receive up to 85% tax-free. Local inheritance tax (stamp duty) is also limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.

There is a wealth tax of sorts, but rates are relatively low and it only affects those whose ownership of Portuguese property is worth more than €600,000 (€1.2 million for couples).

Portugal also offers opportunities to enjoy extremely favourable tax treatment on investments. If you qualify for non-habitual residence, you may further benefit from combining these structures with the regime rules. For example, you could potentially sell a UK property or dip into your pension tax-free and reinvest in a tax-efficient structure such as a life insurance bond.

Ultimately, the best course of action for you will depend on your individual circumstances and aims. Whatever your situation, it is sensible to take personalised advice from a cross-border specialist – sooner rather than later – to make sure you take full advantage of current opportunities in Portugal.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should take personalised advice.

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Blevins Franks has been providing specialist financial advice to British expatriates across Europe for over forty years. Our expertise covers tax, estate planning, pensions and investment management to offer a genuinely holistic approach to financial planning.

If you’re living abroad, thinking about moving, or planning to return to the UK, we can help you make the most of your wealth in the most tax-efficient way possible.